How Fast Must U.S. Employment Expand to Recapture Lost Ground?

December 14, 2009

This past Friday in the New York Times, Paul Krugman’s column projected that U.S. jobs might have to growth about 300K per month to return to full employment by the end of 2014 five years from now.  To an economist, full employment connotes a state where all labor that wants to work is working and a jobless rate below which inflation would accelerate undesirably.  But to the public, the answer people would like to know is how fast must employment climb to attain a level in five years that would have been reached had no recession and jobs contraction occurred and had employment merely expanded at its long-term natural rate.

U.S. jobs rose at an average rate monthly rate of 176,250 during the last quarter of the twentieth century, which included three recessions and the tail end of another.  In the last employment cycle upswing minus year 2007, jobs rose 180K per month from August 2003 to the end of 2006.  In 2006, jobs advanced 178K per month, but that pace slowed sharply to 96K per month in 2007 when the financial crisis began.  The jobless rate was already creeping higher in 2007 after declining from 6.1% in August 2003 to a cyclical low of 4.4% in December 2006.  180K per month seems to be a good estimate of long-term natural growth in U.S. jobs.

If jobs had continued to growth at a 180K per month pace after 2006, 143.48 U.S. workers would be employed at the end of 2009, and the jobs total by the end of 2014 — five years from now — would reach 154.28K, some 23.284 million greater than at present.  It will take a 382K per month rate of jobs growth from its present level of 130.996 million to close such a gap.  Such a pace would be even quicker than Krugman suggested would be needed.  Moreover, even at this more rapid expansionary rate, which has a dim chance of actually happening, the U.S. economy will not be as well off as it would have been had no recession occurred and jobs merely continued to climb at a rate of 180K per month from 2007 to 2014.

A table below demonstrates why the economy would still lag its theoretical trajectory if there had not been a very deep recession.  Only at the end of 2014 is employment as high under the recession-then-recovery scenario as in the “no recession” scenario.  For all earlier months, more Americans are producing goods and services in the simulation where no recession interrupts the business cycle.  The table compares the level of employment at yearend under no recession (column 2)with what it is in the simulation that contains a recession and subsequent recovery (column 3).   The difference expressed in millions of jobs at end-year between the two simulations is shown in column 4.

Jobs mlns No Recession Recession Difference
End-2006 137.0 137.0 0.0
2007 139.2 137.1 1.0
2008 141.3 135.1 6.3
2009 143.5 131.0 12.5
2010 145.6 135.7 10.0
2011 147.8 140.3 7.5
2012 150.0 145.0 5.0
2013 152.1 149.6 2.5
2014 154.3 154.3 0.0


This exercise makes simplifying assumptions, but they bias the result in opposite ways, canceling out to some extent and leaving the bottom line not far from the truth of just how big an economic hole has been dug.  For example, baby boomers may drop out of the labor force at a faster rate than new graduates enter such.  On the other hand, under-employment has soared of people who’ve become discouraged from job searching or settled for part-time instead of full-time work, so the drop of reported jobs understated how deep the hole really became.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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